Indonesian Stocks, Currency Tumble

Indonesian stocks and the rupiah tumbled again on Tuesday as global investors yanked their money from emerging markets amid expectations that the U.S. Federal Reserve will soon begin winding down its massive monetary stimulus program.

The Jakarta Composite Index fell as much as 4.7% in midday trading after tumbling 5.8% a day earlier. Foreign investors were net sellers of around $70 million in shares.

The rupiah fell to a four year-low of 10,580 to the U.S. dollar, even though the central bank was suspected to have sold around $200 million of dollars to calm the market.

Bloomberg

The possibility that the Fed will soon begin winding down its stimulus has prompted investors to sell emerging-market assets in recent months, but the selling in Indonesia has also been fueled by internal factors such as slowing growth and a widening current-account deficit, a broad measure of the flow of goods and services. Now, investors say, the rupiah’s slide is hitting stocks.

“The sentiment is still bearish because investors don’t expect the rupiah to recover in the near future, which has been prompting foreign investors to exit the Indonesian market,” said Reza Priyambada, chief analyst at PT Trust Securities. “Investors are still reluctant to start buying again although some stocks are already cheap.”

This week’s selling follows Bank Indonesia’s disclosure on Friday that the nation’s current-account deficit had widened to bigger-than-expected $9.8 billion during the second quarter of the year due to rising imports, falling export proceeds and a jump in overseas travel by Indonesians.

That was equal to 4.4% of gross domestic product, the biggest such deficit since the Asian financial crisis more than a decade ago, Bank of America Merrill Lynch said in a note on Monday.

Earlier last week, the central bank said foreign-exchange reserves continued to slide as it sold dollars in an attempt to support the rupiah, falling to $92.67 billion in July from $98.10 billion a month earlier.

Indonesia’s financial markets have seen a series of selloffs this year. Monday’s declines in shares and the rupiah reminded investors how exposed the Indonesian markets are to capital outflows.

Foreigners own around a third of the government’s rupiah-denominated bonds—-worth $27 billion. That is one of the highest percentages of foreign ownership in the region.

“There is a perception of a ‘crisis’ in market sentiment due to the re-adjustment of market-sensitive economic variables,” such as the rupiah, foreign-exchange reserves and inflation, said Michelle Chia, a Kuala Lumpur-based regional economist with CIMB Investment Bank. “So I do think there is perhaps more downside that’s yet to play out, especially with the uncertainty of the Federal Reserve’s tapering looming over the capital markets.”

Trying to calm investors, Bank Indonesia Deputy Governor Perry Warjiyo said late Monday that the country’s current-account deficit is likely to narrow in the third quarter. He added that he expects global commodity prices to recover, which would help Indonesia’s commodity-heavy export sector.

Investors seemed unconvinced. “The current account may remain in a structural deficit and persist for longer, unless commodity prices and demand recover more significantly,” Bank of America-Merrill Lynch economist Hak Bin Chua wrote in a research note Tuesday.

Mr. Chua revised his forecast for Indonesia’s current-account deficit for this year to 3.3% of GDP from 2.1%.